A New Restaurant Is Ready to Open for Business

Essay

A new restaurant is ready to open for business. It is estimated that the food costs (variable cost) will be 30% of sales, while fixed costs will be $540,000. The first year's sales estimates are $1,500,000. The cost to start up this restaurant will be $2,000,000. Two financing alternatives are being considered: a) 50% equity financing and 50% debt at 9%, or b) all equity financing. Common stock can be sold at $5 per share.
a) Compute the operating break-even point in dollars (excluding startup costs in year one).
b) Compute DOL at the end of the first projected year.
c) Compute DFL and DCL for both financing plans at the end of the first projected year.